Week 7 Cost Estimating

• As certain as the sun rises each day, you can be confident that when you propose a new project, one of the first questions you will need to answer is: “How much is this going to cost?”

  This is usually a very difficult question to answer with a high degree of confidence. Especially very early in the project. But the answer is critical to whether or not your project is approved, and to whether or not the organization will provide you with a sufficient budget to deliver the project successfully!
• In this first episode of module 6, we present a cost estimating process. We have adopted the process advanced by Neil Albert, one of the leading cost estimators in the profession. One key to success in cost estimating is to adopt a disciplined and structured process to develop your cost estimate!
• Estimate Costs 


  The process of developing an approximation (estimate) of the monetary resources needed to complete project work.
• Cost Estimating Process


  Plan cost estimate; Develop Data Base; Select Cost Estimating Method; Prepare the Risk Assessment; Prepare Estimate; Document Estimate
• Planning the Cost Estimate


  Use team approach; Develop a WBS; Use WBS to develop cost estimating strategy; Document Assumptions; Did I say Document Assumptions!; Use sufficiency Review.
• What develop in estimate? How many hours will take to develop software code? How many bugs will discover during testing, that need to be fixed? What will be cost of building materials three months from now?

  By documenting assumptions, you clearly stating basis of your estimate. Key stake holders can understand why your cost estimate is what it is. It will also give them a chance to point out assumptions that may be contrary to their understanding. The discussion that follows will help everyone to understand the project better, and it will improve the accuracy of your estimate.

  
• Cost Estimating Process and Planning

  One of the reasons it is difficult to estimate costs accurately is because many projects are large and complex. It is difficult to really understand all that is involved. But by using the Work Breakdown Structure (WBS) to guide our estimating efforts, we are able to focus on the work packages, which represent only a small portion of the work and which are a lot easier to understand. If we develop a lot of accurate estimates at the work package level, then we can add all of those together to get a relatively accurate estimate of the entire project.
• Document Assumptions (1)

  Example assumptions related to direct labor costs: Workers will be paid at prevailing wage rate of $28 per hour; workers are already familiar in general with the technology being used on project; workers will be paid for 40 hours per week whether there is always that much work for them or not; Overtime will never be authorized, and; The project schedule cab be delayed if only alternative is to pay overtime.
• Document Assumptions (2)

  Some assumptions are derived from constraints: Only in-house worker will be used; No extra space will be provided; No extra budget will be allowed, and; The current version of the XYZ software will be incorporated into the design.
• Develop the Data Base (3)

  Primary: basic accounting Records; Cost Reports; Historical Databases; Other MIS. Secondary: Contracts, Cost Proposals, Functional Specialists
• There are several methods commonly used to develop cost estimates. These include expert opinion, brainstorming and group methods like the Delphi technique. In this episode we will focus on three of the more robust methods: analogous estimating, parametric estimating and grassroots estimating.

  We will emphasize grassroots estimating because this approach is likely to be a part of most cost estimates you will render. You will want to know these well. We also should point out that we rely on the cost elements presented by your authors Nicholas & Steyn. 
• Select Cost Estimating Methods

  1. Analogous Estimating, 2. Parametric Estimating, 3. Bottom-Up (AKA Grassroots or Engineering)
• Analogous Estimating


  Technique for estimating the duration or cost of an activity or a project using historical data from a similar activity or project.
• Parametric estimating


  an estimating technique in which an algorithm is used to calculate cost or duration based on historical data and project parameters.
• Bottom-UP (AKA Grassroots or engineering) estimating


  Method of estimating project duration or cost by aggregating the estimates of lower level components of work breakdown structure.
• Tips for Picking Analogies

  Ensure it is relevant: consider project and technical perspectives; Seek out recent analogs; Confirm data availability: level of detail, collection mechanisms.
• Parametric Estimating


  An estimating technique in which an algorithm is used to estimate the cost of a project based on historical data and project parameters.

  Models must be calibrated and validated

  Can be based on industry databases
• Parametric Models


  Models based on one fundamental principle:

  $ = f(K x MT/R) 

  WhereK = complexity, quality, specificity

  M = mass, size, quantity, lines of code

  T = time span, schedule constraints

  R = resource effectiveness, relative

  experience, simplicity
• Parametric Estimating Example

  Software Development Projects CER 

  
• A Parametric Advocate


  “Once we have a properly calibrated and validated parametric model, we believe that we can prepare a Major Aircraft proposal in less than one week where it previously took 100 to 120 days. We believe we can also reduce our internal proposal preparation costs from $1M to less than $10K. And finally, working closely with our Customers, we believe that the negotiation span can be significantly reduced as the customer validates our parametric process.” [Fowler, Lockheed Martin]
• Grass Roots

  
• Elements of Estimates


  Estimates and budgets share most or all of the following elements: Direct labor expense; Direct non-labor expense; Overhead expense; Overhead expense; General and administrative expense; Profit; Total billing (sum of above)
• Direct Labor Expense


  Charge of labor for the project. Generally, the product of labor hours and associated labor rates.
• Direct Non-Labor Expense


  Non-labor charges applied directly to the project. Subcontractors; Consultants; Travel; Telephone; Computer time; Material Costs; Purchased Parts; Freight.
• Direct Overhead 


  can be traced to the support of a particular project or work package. Usually allocated on a rational basis (e.g. direct labor). Facilities, Building rents; Utilities; Clerical Assistance; Insurance; Equipment.
• General and Administrative

  Non-direct expenses –that can not be allocated on a rational basis.

  Taxes; Financing; penalty and warranty costs; proposal expenses on lost contracts; marketing and promotion; executive salaries; Employee benefits.
• Profit and Total Billing (Cost)

  
• Cost estimating methods illustrated

  
• Cost Estimating Process -Revisited


  Plan the cost estimate; Develop the data base; select the cost estimating methods; prepare the risk assessment; prepare the estimate; document the estimate.
• Cost Estimating Methods Thoughts 

  Be transparent level of uncertainty associated with estimate. If project very similar to previous project you completed prior year, were able to develop estimate using available cost data, there may be little uncertainty in estimate. But if estimating something very new and unique, your best estimate may still be highly uncertain and should communicate this to governance / stakeholders.

  Present your estimate as a range. If this uncertainty is not acceptable to the executive, it will give him or her a chance to set the budget with eyes wide open
• Sources of Cost Escalation



  Uncertainty and lack of accurate information; changes in design or requirements; Economic and social variables in the environment; Work inefficiency, poor communication, and lack of control; ego involvement of estimator; kind of project contract.
• Common Pitfalls


  Insufficient Project definition; Omission of costs; unrealistic ground rules and assumptions; estimate out of date; replication history precisely instead of adjusting for change.
• Accuracy of estimates

  
• In this final episode of module 6, we will demonstrate how you can take your project cost estimate and develop a time-phased budget against which you can measure your performance. The Work Breakdown Structure will be key. In our example we will use the work packages to build the budget. Each work package has a cost, and each work package has a planned start and finish date. We can use

  these data to distribute cost over time and create a time-phased budget. What about the cost to sustain the solution over time? This is an important consideration…. even when eval whether approve initial project
• Determine Budget 


  The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. Project Budget – the agreed-upon contracted amount of what the work should cost and the baseline against which expenditures will be compared for tracking and control purposes. [Nicholas]
• Cost Budgeting

  
• Cost Budgeting (2)


  The cost baseline is a time-phased budget that will

  be used to measure and monitor cost performance

  
• System Life Cycle Costs (1)


  All costs of system thought its full cradle-to-grave life cycle, i.e.: all costs incurred during project life cycle phases of definition and execution; PLUS all costs associated with operations phase of system and eventual disposal of system.
• Purpose of life cycle cost analysis:


  To anticipate realities of operating, maintaining, and disposing of end-item system; To establish target costs for operating, maintaining, and disposing end-item system. To design system so will meet those target costs.
• Analogous Estimating


  • Use information from similar previous recent projects to make the

  estimate.

  • It can be used in the whole project or part of it.

  • It requires defining similarity/difference parameters with previous

  projects and assumptions to extrapolate.

  • It requires little time.

  • It gives a global idea of time/cost.

  • REQUIREMENT: Documented Project History